Morningstar Equities Research - 24 Jan 2013

AMP Limited AMP| Earnings expected to rebound on
stronger marketsMorningstar Recommendation:
AccumulateDavid Ellis, Head of Australian Bank Research

AMP reports FY12 earnings on 21 February 2013
and we expect a strong result following the disappointing
FY11 performance. AMP timed the AXA acquisition in early
2011 superbly, with investment markets now turning and
investor confidence starting to recover. We expect earnings
momentum to improve and we increase our full year FY12
earnings forecast marginally from $986m to $992m. The wealth
management group’s leverage to equity markets will support
strong growth in 2013 and 2014. We retain our positive view
and expect further improvement as the AXA integration moves
closer to completion. Reflecting the improved earnings
outlook we raise our medium term earnings outlook and
upgrade our valuation from $5.60 to $6.50.

BHP
Billiton Limited BHP | BHP Second Quarter Production
SizzlesMorningstar Recommendation: AccumulateMark
Taylor, Associate Head of Basic Materials BHP
reported impressive second quarter production with most
commodities up strongly on both the September and previous
corresponding quarters. In many cases, in percentage terms,
output growth was double digit or better. Compared to the
September quarter, sales volumes rose 10% for iron ore, 23%
for copper, 20% for coking coal and 13% for aluminium - all
above our expectations. Strong rises are notable for being
in some of the highest margin businesses.

Boral
Limited BLD | Weather gods finally give Boral a break -
underpinning upbeat first half trading updateMorningstar
Recommendation: ReduceNathan Zaia, Equities
AnalystBoral kept the good news rolling today
as management upgraded guidance for first half net profit
after tax to AUD 52 million, up from previous guidance of
AUD 35 million. While a profit upgrade is always welcome,
upgrading guidance by 48% within three months of previous
guidance illustrates why we assign Boral a very-high
uncertainty rating. Driving the upgrade is better than
expected demand for Australian construction materials. More
favorable weather conditions play a big role when it comes
to construction. Management also noted benefits from recent
restructuring and rationalisation, but we suspect little
impact during the half as they have only just taken place.
While the first half 2013 result is a massive improvement to
initial guidance, and big turnaround from second half 2012,
it is still well below the AUD 67 million reported in the
first half 2012. But the earnings trajectory is heading in
the right direction, and we take comfort in management’s
cost cutting initiatives announced last week. Resetting the
cost base for a lower demand environment, and we suspect
trimming unnecessary fat which commonly builds in many
corporations during prosperous times, particularly as
management strive to build a bigger and bigger
business.

Brambles Limited BXB | First half
results likely to show modest growth but point to stronger
fiscal 2014Morningstar Recommendation: ReducePeter
Rae, Head of Industrials Research We review
Brambles ahead of the release of its first half fiscal 2013
result and update our numbers to reflect the recent
acquisition of the Pallecon intermediate bulk container
(IBC) business. The acquisition does not materially change
our forecasts and our valuation is unchanged at AUD 7.00. We
view Brambles favourably and expect it will continue to
achieve strong growth from its entry into new regions and
expansion of the reusable plastic crate business which helps
to offset weak conditions in its core developed markets. But
with the shares trading above our fair value estimate this
growth is reflected in the current price.

Crown
Limited CWN | Approval received in Perth, Macau recovers in
4QMorningstar Recommendation: HoldMichael Wu,
Equities Analyst The Gaming and Wagering
Commission of Western Australia approved additional gaming
facilities at Crown Perth late last year. This is
conditional on Crown’s AUD 568 million development of a
new luxury hotel at the complex, which includes AUD 60
million to the State Government for land. The extra gaming
facilities include a total of 500 gaming machines and 100
gaming tables, rolled out over five years and four years
period respectively. This takes total gaming machines and
tables at the casino complex to 2,500 and 320 respectively.
We expect the gaming machines to be rolled out from fiscal
2014 but tables will likely be added as the expansion
project nears completion. An additional 30 gaming tables are
yet to be approved by the regulator and we have not factored
this into our forecast.

GUD Holdings Limited GUD |
Christmas sales disappoint as competition
intensifiesMorningstar Recommendation: HoldMichael
Higgins, Associate Analyst Trading conditions
across GUD’s primary consumer business remain challenging.
1H13 adjusted NPAT fell 9% on sales growth of 0.2%. The
slow-down in the consumer segment was more severe than
forecast, but consistent with our underlying thesis of
increased competition from lower priced house brand products
coupled with weak demand. The $1.8m loss in Breville
dividends also dragged on the result. Dexion experienced
stronger than expected growth - sales were up 20% on a
recovery in large distribution centres and demand for
warehouse racking and automated solutions in Asia. The
interim dividend of 26cps (compared to 30cps last year )
will be paid on the 6th March together with the previously
announced special cash dividend of 10cps. With business
conditions forecast to remain sluggish, we struggle to see
significant outperformance from current levels. The stock
trades at a high 14.4x FY13 PER, a reflection of investor
appetite for dividend paying companies. We lower our FY13
NPAT assumption to $41.0m, down 10% from $45.6m. Full year
dividends also fall in line. Fair value is cut 6% to
$8.

IOOF Holdings Limited IFL| Well positioned for
a sustained recovery in investment marketsMorningstar
Recommendation: HoldRavi Reddy, Equities Analyst
We upgrade our forecasts given the strong
performance of Australian equity markets over the six months
to 31 December 2012. The S&P/ASX 200 accumulation index
returned 16.39% over this period. We have also upgraded our
longer term forecasts. Our fair value estimate increases
from $6.50 to $7.50 and the stock looks fairly valued around
at current levels.

Nufarm Limited NUF| Guidance
maintained despite weaker trading conditions in
AustraliaMorningstar Recommendation: HoldPeter Rae,
Head of Industrials Research Despite
challenging trading conditions in Australia, Nufarm
maintained guidance for first half fiscal 2013 EBIT – on
an underlying basis – to be at least 15% higher than first
half fiscal 2012. The weak Australian conditions have been
more than offset by stronger conditions in other regions.
Nufarm also announced that BASF will terminate its
distribution arrangements in Australia from 1 March 2014.
While this will lead to a loss of revenue for Nufarm of
around AUD 60 million per annum, this represents just 3% of
group revenue. With first half guidance maintained we make
no changes to our fiscal 2013 forecasts. At this stage we
make no changes to allow for the termination of the BASF
agreement. Given it is a relatively small component of the
overall business this can be accommodated within our
existing forecasts. Our valuation is unchanged. Nufarm has a
strong global crop protection business with strong
distribution capabilities and key market positions in its
core products, but remains exposed to cyclical demand from
agricultural markets and has limited pricing power in some
of its products.

SkyCity Entertainment Group
Limited SKC , SKC-NZ | A transformative deal that will
underpin casino earningsMorningstar Recommendation:
AccumulateNachi Moghe, Senior Equities Analyst – NZ
SKC will invest AUD 350 million in expanding
its casino operations in Adelaide after reaching an
agreement with the South Australian government. The
regulatory relief obtained from the government, involving
increased gaming product and lower VIP taxes, is likely to
significantly enhance the competitive position of the
Adelaide casino and dramatically lift earnings over time. We
forecast Adelaide’s EBITDA to increase by AUD 62 million
on an incremental basis by FY18, implying a post tax return
on investment of 10.5% which will rise to 18.3% by 2022. Our
FY14 and FY15 projections increase by 1% and 2% respectively
reflecting the addition of VIP electronic gaming machines.
The real kicker from the expansion comes in
FY18.

Sydney Airport SYD | Strong Finish to the
YearMorningstar Recommendation: HoldMichael Wu,
Equities Analyst After a slow start to 2012,
Sydney Airport had a good second half with international
growth remaining solid and domestic growth improving.
Overall passenger numbers increased 3.6% to 36.9 million
during the year. Increased low-cost carrier capacity was the
main driver, in particular Scoot, Jetstar and AirAsia X
internationally, and Jetstar and Tiger
domestically.

Western Areas Limited WSA | Solid
quarters productionMorningstar Recommendation:
HoldMathew Hodge, Senior Equities Analyst
December quarter mine output of 6,950 tonnes of
nickel, though 7% below the previous quarter, was in line
with expectations. Nickel in concentrate output was in line
with the September quarter at 6,830 tonnes but 6% ahead of
expectations with mine feed augmented by stockpiled ore.
Cash costs increased from AUD 2.49 to AUD 2.89 per pound of
nickel in concentrate. This is not a surprise. We forecast
cash costs to rise primarily with a gradual decline in mined
grades. Though costs have risen, they are still low by
industry standards and we expect Western Areas to remain a
relatively low cost producer underpinned by the very high
grade Flying Fox, Spotted Quoll and Lounge Lizard
deposits.Downer EDI - Downgrade due to price
change.

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